05/29/2012 Second Attempt to rotate DD into SAI

Second attempt to rotate:

Sell DD and buy SAI unless SAI gaps up from DD.

05/28/2012 Planned Rotation; DD for SAI

Condition	Bear Market
S&P Target	1240
Small Portfolio	IAU & XLF	5.01%
Hedge	XLU	-4.18%
Position	Date	Return	Days	Call
GCI	7/14/2011	-1.67%	319	Hold
CSGS	10/3/2011	29.59%	238	Hold
NLY	10/25/2011	9.01%	216	Hold
DD	10/27/2011	7.65%	214	Hold
KBR	10/27/2011	-9.95%	214	Hold
VG	10/27/2011	-48.33%	214	Buy
TTM	11/30/2011	42.50%	180	Hold
BT	1/4/2012	3.46%	145	Hold
PDLI	3/7/2012	6.40%	82	Hold
CLF	3/19/2012	-29.53%	70	Hold
S&P	Annualized	-2.05%
Small Portfolio	Annualized	5.04%
Mousetrap	Annualized	6.71%
Hedged	Annualized	2.50%

PLANNED ROTATION: sell DD and buy SAI.

I’ve been sick all week, so I have some catching up to do on the state of the world.

A couple of short notes on the model, though.

This week will reach the end of the Beta test, and with a year of live testing I have a good idea of the correct rotation rate.  Accordingly, I have DD up on the chopping block tomorrow morning.  If SAI gaps lower than DD, I’ll rotate.  If not, not (i.e. the rotations are not that urgent, and I’ll average about 1 a month on the current readings of the model).

It’s worth noting that the Small Portfolio would be outperforming the other options if I had not been hedging it with IAU (gold).  I’m considering simply holding one or two sectors and calling it a day.  No use being too clever when simple works better.  I’ll do a bit of tinkering to make sure that’s the best route, and the Small Portfolio will likely have a slight change starting next week.

In any case, it’s been an okay year in a time that value investing has taken a huge hit.  Greenblatt’s portfolio on Validea is down by double digits, and my technical filters have added about 20% of value over using Greenblatt alone. 

My goal for this test was to see if I could take advantage of BOTH Greenblatt AND my technicals by outperforming  the S&P by more than each alone.  Unfortunately, Greenblatt’s “Magic Formula” had one of its worst years on record and there is no way to quantify the original purpose of the test.  While I have indeed added value with my model, I have no idea how I would have done if Greenblatt had had a good year.

Next year, perhaps.  But my goal going forward will be to find better fundamentals to use.  Greenblatt was just a placeholder for the first year.

Onward and upward.

But first… time for another dose of cough medicine…

Tim

Some interesting links:

http://www.theatlanticwire.com/business/2012/05/behold-power-superstar-investor/52490/

http://www.slate.com/articles/health_and_science/new_scientist/2012/05/risk_intelligence_how_gamblers_and_weather_forecasters_assess_probabilities_.html

http://www.projectionpoint.com/

                                                                                       

05/19/2012 DON'T PANIC!!!! ;-)

Condition	Bear Market
S&P Target	1240
Small Portfolio	IAU & XLF	4.68%
Hedge	XLU	-3.13%
Position	Date	Return	Days	Call
GCI	7/14/2011	-1.82%	310	Hold
CSGS	10/3/2011	29.51%	229	Hold
NLY	10/25/2011	5.42%	207	Hold
DD	10/27/2011	6.69%	205	Hold
KBR	10/27/2011	-9.54%	205	Hold
VG	10/27/2011	-48.33%	205	Buy
TTM	11/30/2011	40.05%	171	Hold
BT	1/4/2012	2.82%	136	Hold
PDLI	3/7/2012	1.48%	73	Hold
CLF	3/19/2012	-31.76%	61	Hold
S&P	Annualized	-3.83%
Small Portfolio	Annualized	4.83%
Mousetrap	Annualized	5.37%
Hedged	Annualized	2.14%

On a week like this one, it’s important to take a step back when looking at the state of the market.

We are now 62 points down on the S&P from the point that I said the “Bear Market Rally” status was changed to “Bear Market.”  My timing is a work in progress, so I don’t aggressively short.  Eventually perhaps I will.

So what do my timing indicators say?  Well, they are still mixed.  My yield ratio model is treating this as a correction in a bull market, with a bottom around 1265 on the S&P.  An alternate low on that model could go as low as 1205.  Not the tightest of ranges, but not the end of the world either.  The expected gain for the next year is 19.10% on the S&P from Friday’s closing price.

My sector configuration model shows that a normal bear market rotation could go as far as 900, but a bull correction would have us higher just a month from now.  The expected gain for the next year is 19.98% on the S&P from Friday’s closing price.

The outlier on the models is the 900 reading.

The more probable reading has us close to a bottom (if 5% is close), with a reasonable expected gain for long positions that are held over the course of the next year.

Nevertheless, as long as the money-flow is strongest in the bearish sectors, there isn’t much use puzzling over whether this is a “Bull Market Correction” or just a “Bear Market.”  A “bottom” normally shows up as a panic washout.  On Friday, for instance, the Nasdaq up volume was 37% and the down volume was 62%.  That’s hardly a panic washout.

On a bottom we also see some sector rotation as market bounces a time or two.  We haven’t had a panic, we haven’t rotated, and we sure haven’t bounced.

The Mousetrap is 12 days away from the completion of the beta test, and I still have not found the correct holding period.  That’s a good thing!  If the correct holding period is greater than a year, the model will reach one of its primary goals as a Low Frequency Trading algorithm.  Right now it appears that a year holding period should outperform the S&P on average by 15%.  The 9.20% outperformance shown above is because I was rotating the stocks too quickly.

Human error cost me almost 6%.

I do not plan to continue that process.  15% is more attractive.

The market is getting ready to panic.  Probably not a big deal.  Yes, Europe scares the hell out of me too.  I don’t see how we can possibly survive.  My instincts tell me to buy gold and run for the hills.

Eh… being hedged is probably good enough…

Tim

05/17/2012 (pre-market) Position note

On both tries, TTM gapped down while the target replacement gapped up.  There is no new target for this morning.  All positions remain unchanged.

05/15/2012 Position Change

Second try on a position change.  DECK gapped away from its buy window.

In the morning I will exchange TTM for BHP, unless they gap more than 1% away from each other at the open.

05/14/2012 Position change

I'll be making a change in the holdings of the Mousetrap tomorrow:

If DECK (Deckers Outdoor) in the Shoe industry is within 1% of TTM (Tata Motors), I'll sell TTM and replace it with DECK.

If they gap away from each other at the open I won't make the change.

05/13/2012 Mousetrap: a significant advantage over Greenblatt

Condition	Bear Market
S&P Target	1240
Small Portfolio	IAU & XLF	8.16%
Hedge	XLU	-4.62%
Position	Date	Return	Days	Call
GCI	7/14/2011	1.29%	304	Hold
CSGS	10/3/2011	30.78%	223	Hold
NLY	10/25/2011	8.75%	201	Hold
DD	10/27/2011	14.70%	199	Hold
KBR	10/27/2011	2.72%	199	Hold
VG	10/27/2011	-46.50%	199	Buy
TTM	11/30/2011	64.67%	165	Hold
BT	1/4/2012	7.34%	130	Hold
PDLI	3/7/2012	6.73%	67	Hold
CLF	3/19/2012	-22.31%	55	Hold
S&P	Annualized	0.64%
Small Portfolio	Annualized	8.57%
Mousetrap	Annualized	13.19%
Hedged	Annualized	8.34%

When I started this test on 5/31/2011, I was very specific in my choice of filters.  The technical filter measured long term volume-breadth to price-strength ratios in 98 industry groups.  The fundamental filter was Greenblatt’s so-called “Magic Formula”, ranking stocks according to their 12 month trailing earnings yield and return on total capital.

Greenblatt’s filter wasn’t necessarily the best, but it was the easiest to adapt to my own model.  It also had the added advantage that it was being tracked in an automated portfolio on www.validea.com.

I like validea – a lot.  I especially like their Benjamin Graham inspired “Value Investor” portfolio.  But I had tested Greenblatt in real time for two years and found that it did well during that time period, and validea showed it performing well enough to use for my own Mousetrap test.

My test wasn’t to see if Greenblatt’s filter would work, but instead to see if my technical filters could add value to his fundamental selection method.

So I have to be honest that I was disappointed when my hybrid model wasn’t showing quite the advantage over the S&P I was hoping for.  Yes, that is a double digit lead up there, but not in the target range I was hoping for.

What I did not realize until Friday was that Greenblatt’s formula was having one of its worst years on record.  While my own model is up at a 13% annualized rate, Greenblatt’s is DOWN 16%!

These are the selections on the Greenblatt annual portfolio that were selected on 7/8/2011:

Symbol	Company	Date	Buy	Current	Return
		Added	Price	Price
STRA	STRAYER EDUCATION INC	7/8/2011	$137.48	$91.47	-33.50%
DLX	DELUXE CORPORATION	7/8/2011	$26.18	$23.89	-8.70%
USNA	USANA HEALTH SCIENCES, INC.	7/8/2011	$31.61	$38.59	22.10%
MDP	MEREDITH CORPORATION	7/8/2011	$31.41	$27.83	-11.40%
VECO	VEECO INSTRUMENTS INC.	7/8/2011	$44.84	$36.97	-17.60%
LPS	LENDER PROCESSING SERVICES, INC.	7/8/2011	$20.23	$24.69	22.00%
ASMI	ASM INTERNATIONAL NV (ADR)	7/8/2011	$38.48	$33.46	-13.00%
PWER	POWER ONE INC	7/8/2011	$7.91	$4.01	-49.30%
HHS	HARTE-HANKS, INC.	7/8/2011	$8.39	$8.47	1.00%
CECO	CAREER EDUCATION CORP.	7/8/2011	$22.72	$6.21	-72.70%
			Average		-16.11%

On 7/8/2011 the S&P closed at 1343.80.  Friday it closed at 1353.39.  Basically flat for the year, but certainly better than a 16% loss.

The fact that I was holding my own using the same filter shows promise.

As for the news…

We continue to see the slow train wreck of a secular bear market, with the Europeans squabbling over how to hold the Euro together instead of trying to find a way to save their economies.  As long as they have the wrong goals, they won’t even be able to begin the healing process.

Over here we are having an energy revolution in the US.  It’s not just natural gas, but land based drilling has actually increased in the last 3 years.  You’d never know from the President’s own stated antipathy to natural resources, but it’s happening nonetheless.  If oil drilling is increasing in spite of political roadblocks, it just may be powerful enough to pull our economy out of danger.

It’s impossible to tell.  We can make models that look to the past, but a secular market changes the rules.

In the mean time, the S&P wasted a year, Greenblatt had a mini-disaster, and the Mousetrap did okay.  Two more weeks will wrap up the beta test, and I’ll give a more detailed report then.

Tim